Restructuring Commercial Debt: World Bank Experience

1. restructuring commercial debt under unfavorable market conditions: World bank experience PRESENTED DURING AN EAZ EVENT ON DEBT RESTRUCTURING August 23, 2018 Lusaka Zambia WBG Zambia

2. Global financing Conditions are not favourable for market access And global market rates are edging upwards The US Fed rate has reached its peak since Sept 2008 WBG Zambia

3. In addition, Zambia’s own Conditions are not very favourable for international market access Eurobond spreads are wider Copper prices are softening WBG Zambia

4. … Zambia’s Conditions are not very favourable for international market access Low reserves and falling copper prices are key risks to short- and medium currency stability … Although the Kwacha remains stable WBG Zambia

5. Zambia’s sovereign debt ratings are less favourable when compared to previous Eurobond issuances Zambia’s present ratings for sovereign issuer are not as favourable as during past Eurobond issuances WBG Zambia

6. How can Zambia improve market access? • Zambia has no control over: • The US fed rate and global lending rates • Copper prices. • But it can adjust its domestic policies to: • Implement austerity measures. • Build reserves, which support the kwacha. • To improve growth. • Return to medium-risk of debt distress. • Improved sovereign ratings. WBG Zambia

7. In 2015, Ghana wanted to meet pressing refinancing deadlines, extend debt maturities to reduce fiscal pressure, and smooth out its debt service profile Despite having an IMF Program, Ghana’s market access was costly due to: • Falling oil and commodity prices. • An unstable and depreciating Ghanaian Cedi. • High market volatility for emerging markets. • Weak sovereign rating was poor due to high debt levels. WBG Zambia

8. world bank supported Ghana to access international markets using a policy-based guarantee (pbg) • Ghana wanted to borrow US$ 1 billion to restructure its short term debt. • World Bank supported with guarantee of US$ 400 million. • World Bank also provided US$ 150 million in budget support. • The WB’s PBG enabled Ghana to restructure debt at favourable terms: • Ghana’s rating for the issuance was revised by two notches: e.g. Moody’s revised rating from B3 to B – WB’s rating is AAA. • Ghana managed to issue the longest ever Eurobond tenor (15 years) by a Sub-Saharan African country (except South Africa). • Yields at issuance were reduced by 200 bps compared to market rate. • 100 percent over-subscribed order book with a diversified investor base compared to standalone bonds. WBG Zambia

9. What is required to access a policy-based guarantee (PBG)? • A robust macroeconomic and fiscal framework: • Low fiscal and external imbalances, sustainable debt level, low arrears, etc. • If not, a credible plan with timelines to address these should be approved and implemented. • In addition, there should be a track record of policy commitment e.g. good budget credibility. • If the macro-fiscal framework is not robust, an IMF Program is required. • Why is a robust macroeconomic and fiscal framework? • A policy-based guarantee and budget support is unlikely to achieve intended policy reforms if the macroeconomic framework is not sustainable. • Fixing short term challenges without addressing the underlying policy challenges will entail that the problem will reoccur in the future. • The Independent Evaluation Group (IEG) found that out of 10 countries that benefited from PBG, the benefits from market access were only sustained in those with solid macro-fiscal framework. WBG Zambia